The invoice lifecycle

From the moment a sale occurs to the time you get paid, an invoice goes through various stages. Understanding and managing every stage efficiently can make a huge difference to your bottom line, especially in case of new start ups and small businesses. By understanding how an invoice is processed, you can improve your business performance.

Conception

The birth of an invoice is not when it’s generated by the seller. It’s when the client puts in the order. Some businesses demand a Purchase Order (PO) as order confirmation. The PO evolves into an invoice.

The invoice template must contain important details such as ABN, contact details, reference to the job, payment terms and conditions, and modes of payments offered.

Don’t be afraid to enforce your payment terms to your clients. Malcolm Fox, a curtain manufacturer, has a no exception rule to his 7 day payment policy. He ensures that his clients are fully familiar with his terms at the time of ordering. One of his large clients, who generally only pay all bills once a month, has changed its ways to honour Malcolm’s invoices weekly. He’s never suffered a bad debtor by being diligent about his credit control!

For quicker payments, opt for EFT, PayPal or other electronic payments. Clients prefer it too. It means less paperwork, sorting and storing. Highlight the important details. Make it as easy as possible for your client to pay it.

How it travels

At the dispatch stage, an invoice is printed and posted to the client or emailed. Emailing reduces the risk of delayed, or lost post and is well known to result in swifter payment.

An invoice mostly ends up with client’s accounts payable team and spends most of its life span there. Ideally it is paid within the requested payment period.

But outstanding invoices are common and chasing them is a hassle. That’s why trackable invoices are important. A system that alerts a business owner about overdue payments can offer a tremendous advantage to the business’s cash flow. If you don’t like making dreaded phone calls to chase your clients, try SMS and email reminders. They are particularly effective.

Happy ever after

The sight of $$$ coming in, is the best sight of all for a business owner. At the collection stage, ensure accurate matching of funds received, with the right client.

Be ready to manage complex invoicing issues like part-payments or one payment covering several invoices.

Why monitor the invoice life cycle?

By understanding and observing the various stages, you can improve internal processes. If there is a time lag between the creation of the invoice and dispatch, how can you reduce it?

Create and use reports at various stages to your advantage. By understanding the patterns of various stages, you can make informed decisions about frequency, speed, and patterns of payments.

Reward timely payers

Encourage clients to make up-front payments potentially for a small discount. Those who pay at a certain time of month or year (e.g. quarter end) may be requested for part pre-payment at the time of order.

Manage debts

Keep an eye on the total amount owed. Keep it as low as possible. Apportion outstanding amounts to each customer and how long it’s been due for.

Save money

Invoice management may seem like a momentous task. But don’t give up too soon and hand over the reins to expensive bookkeeper. Equip yourself with basic understanding and employ the right tools. Improved control over your invoicing leads to healthier cash flow. Not to mention more time to grow your business in the right direction. Happy invoicing!

Written by Giles Donovan, CEO Reach Accounting.

Reach Accounting is an online application that makes invoices & BAS easy for small business owners.